India’s online grocery retail market is once again going through a disruptive phase as quick commerce (q-commerce) products such as Zepto, Dunzo, Blinkit, Swiggy Instamart and BBNow gain steam. Estimates from management consulting firm RedSeer indicate that the q-commerce market is currently valued at around $715 million, or just 13% of the current online grocery market. This number, however, is expected to grow to a whopping $5.5 billion by 2025, the consultancy firm said in a recent report in March.
Quick commerce start-ups such as Swiggy, Zepto and Blinkit are already topping consumer internet funding charts. In December 2021, Swiggy said it would invest $700 million into its instant grocery delivery service Instamart, while the latest contender, Zepto, raised $100 million at a $570-million valuation within just nine months of launch, breaking all previous records set by hyperlocal delivery firms.
This isn’t the first time that e-grocery in India has gone through a disruptive phase. Between 2017 and 2019, grocery delivery players positioned the morning milk-delivery subscription model as a disruptive offering. But many start-ups in this model, namely Doodhwala, Ninjacart, and SuprDaily, eventually had to downscale operations or explore M&As with bigger rivals like BigBasket and Swiggy to sustain their businesses.
Also, when e-grocers such as PepperTap (now defunct), Grofers (now Blinkit), and Swiggy’s Instamart first entered the market many years ago, they mostly worked as aggregators who sourced supply from nearby speciality stores and supermarkets. Later by mid-2018, most of them ditched the aggregation model and pivoted into a pure-play inventory model, operating out of warehouses and dark stores. Many also launched their own grocery private label in search of higher margins as seen in the case of Dunzo, BigBasket, and Blinkit.
While q-commerce start-ups such as Blinkit, Zepto, Instamart and others continue to expand in metropolitan areas currently, it is still unclear whether their pitch would see demand beyond Tier-1 geographies. Hence, the questions that most observers seem to be asking are: Can q-commerce apps break through Tier-2 and 3 towns and beyond? What are its strategic options for expansion? And most importantly, do India’s internet users actually require a 10-minute delivery?
Analysts that FE spoke with say that though there is a large enough total addressable market (TAM) for q-commerce, it is unclear as to whether there is a market opportunity for all the major players to co-exist. This situation is reminiscent of the early boom of the food delivery segment in India which started with around 4-5 players and eventually narrowed into a duopoly (Swiggy and Zomato).
“There is a market potential for q-commerce, however, it will be the survival of the fittest. Currently, most of the q-commerce companies are focussed on groceries which is traditionally a low margin business. The way forward will be further diversification into other segments like medicines and even basic electronic accessories to expand the SKU base.
However, these companies are burning cash right now due to extensive advertising and discounts being offered to onboard the customers. But over a period of time, they have to make sure that the model turns profitable. Managing effective supply chains will be the key to success,” Naveen Malpani, partner and consumer sector leader, Grant Thornton said in an interview.
The players are, however, quite upbeat. Zepto’s co-founder and CEO Aadit Palicha said there were clear advantages in the grocery delivery model supported by mini-warehouses when compared with the store aggregation model. Some of Zepto’s earlier consumers who were very close to Zepto’s partner stores began getting deliveries in 15 minutes or less. These customers projected higher NPS scores when compared with users who go their deliveries after 30 minutes or higher. Palicha added that the customer retention for the former set of customers was through the roof, and eventually the start-up decided to narrow down on this model.
“We just saw some magic in the customer experience metrics were all of a sudden their NPS was incredibly high. The order retention was hovering around the 100% plus mark on a weekly basis and this was never seen before. That’s when we start experimenting with 10-minute delivery consistently through a network of our own network of highly optimised micro warehouses or dark stores.”
Consultancy firm RedSeer’s estimates show that q-commerce currently has a total addressable market (TAM) of around $45 billion mostly in just metro and Tier-1 cities where mid- to high-income household penetration is the highest. This translates to around 20 million households in the country. But, evidently, q-commerce users aren’t loyal users, since a majority of the users are discount hunters, and depend on these apps for unplanned spot purchases rather than using them for weekly bulk purchases.
However, after the pandemic, a user survey conducted by RedSeer in September 2021 showed that 70% of the users in metro and Tier-1 geographies preferred to make unplanned purchases of small quantities throughout the week, rather than large monthly purchases. This indicates a fundamental shift in online consumer behaviour patterns which could be beneficial to the q-commerce revolution. Yet some concerns remain on the unit economic front.
Even though q-commerce start-ups such as Instamart, Dunzo and Zepto claim to have more than 100,000 daily orders currently, the average order value (AOV) is significantly lower than the big grocery delivery layers, multiple industry insiders that FE spoke with said. This is, in fact, why both these apps charge hefty delivery fees on the orders.
“Quick commerce apps that currently operate their own dark store have the capability to acquire 15% margins on every order (average) which is similar to a small kirana or a supermarket. But the challenge is that e-commerce app orders have an additional cost as capex for managing the physical store itself, and the cost of paying salary to ground staff managing the store. So roughly, a store that stock 800-1000 SKUs can breakeven at Rs 50 lakh GMV sales per month,” a product management executive at q-commerce delivery firm said, asking to remain anonymous.
However, analysts say that these start-ups are missing out on developing better unit economics since a majority of them have ignored the massive distribution capacity of local kiranas and supermarkets, which could in turn, double up as warehouses. With deploying their own dark stores, q-commerce apps are also now a direct competition to kiranas.
“There is still a sizeable population in India who will still refer to buy groceries by having a look and feel for the product, which only a kirana can support. Whilst the kirana stores are feeling the heat of q-commerce, they are also adopting basic technologies like WhatsApp and online payment platforms to reach their local customers. With limited operational overheads, and an ability to manage their inventories as per the local requirements, kiranas will give stiff competition to all the q-commerce companies. Some of the q-commerce companies are actually onboarding local kirana stores so that they can manage the deliveries and they don’t have to maintain dark stores everywhere, which is a more economically viable option. But still, there is currently a market for both the models,” Malpani of Grant Thornton added.